The New Challenges Facing Airlines like Air Mauritius

On last Monday, share trading of Air Mauritius was suspended on the Stock Exchange of Mauritius. The share price went down sharply.

There were rumours towards the end of last week that the national airline would be facing serious financial difficulties. This was sought to be linked up to undue costs having to be borne by the airline in respect of an ill-conceived oil hedging contract. It rang a familiar bell from a not too distant past when the company had engaged into what looked like a real ill-conceived long-term hedging contract for fuel oil. Statements were even made that the airline would be heading for bankruptcy if oil price remained stable around its current level.

This series of adverse reports no doubt fed into share trading, driving down the company’s share price brutally. People may not know it but there is a threshold daily tolerance limit for share price movement on the trading floor for all listed companies – is it still 20%? – beyond which share trading is automatically suspended. When such a brake is applied, it tends to correct temporary market frenzy only to enable share trading to proceed with more serenity thereafter.

All this has been denied by Air Mauritius, of course. The airline has claimed that it has cash flows enough from its regular earnings and existing bank facilities to meet its normal financial commitments. It has not denied having hedged itself against oil price fluctuations in accordance with expert advice and industry norms but this is not to say that it is not availing itself of prevailing low oil prices. In other respects, it has claimed that the ratio of its debts to its share capital is in line with industry norms.

It may well be that all is not in the best of worlds currently for our national airline. It is no doubt struggling with the depreciation of the Euro – the currency of its major earnings –against the internationally appreciating US dollar – the currency in which it incurs most of its expenses, including the largest part for fuel oil. Political intrusions must have also not allowed the company to work optimally. But the way for Air Mauritius is forward –how it should beef itself up for the fight in a fast changing and pitiless evolution of international civil aviation connectivities and strategies. Were it to look backward to settle past scores, it would only be wasting precious time to the detriment of its urgent re-positioning.

The Minister of Tourism stated recently that, in a bid to improve the attractiveness and cost of travelling to Mauritius, whereas Air Mauritius and Emirates had agreed to reduce their ticket price from and to Mauritius, Air France with which Air Mauritius has entered into an alliance, has refused to do so. Such a want of cooperation will surely not improve the relative competitiveness of Mauritius vis-à-vis rival tourist destinations. It may well be that conventional airlines (also called ‘legacy airlines’) like Air France, KLM and Lufthansa are maintaining the pressure to make up for years of bad management. But that is not exactly the kettle of fish for Air Mauritius. It has to fight it up in a war-torn global civil aviation industry from a totally different perspective as compared to Air France- KLM and consorts.

The current global civil aviation conditions are posing a serious challenge for the very survival of small aviation companies like Air Mauritius, essentially connecting people to and from its home centre. To effectively face the challenge, it is necessary to understand the context in which we operate. Having operated for a long number of years with a limited fleet of airplanes, some of them ageing on top of that, Air Mauritius slashed its ambition to serve long-haul third country markets a long time ago. Indeed, faced with rising cost constraints, it decided to abandon only recently some of the airports other than its long-haul destinations, notably in Europe and Asia, which meant a lesser number of passengers flying Air Mauritius. This is symptomatic of shrinking.

Now, consider the strategy of the world’s most successful airlines. There are four of them, all from the Middle East and nearby: Emirates, Qatar Airways, Etihad Airways and Turkish Airlines. In 2008, all four of them carried 50 million passengers in and out of their hubs; in 2014, this figure soared to 115 million. They have a combined fleet of 700 airplanes and they have placed orders for 900 others. The scale of success of their strategy is seen from the fact that Dubai, Qatar, Abu Dhabi and Istanbul have been transformed into major international hubs for ferrying passengers bound for Europe, America, Africa and Asia, stopping over in these hubs. Dubai overtook London Heathrow last year as the world’s busiest airport for international traffic.

The success came not only by exploiting to the full the strategic position of their countries lying in between two of the most economically active and culturally richest parts of the world, notably Asia and the West. It also came through a process of constant modernizing of airports and creating more others of high standing wherever it added to the opportunities of increasing the span of their wings. Their governments have been overly generous to support their expansion. An American study has found that the governments of the Gulf have given huge subsidies of all sorts – from generous contributions to raise the airlines’ capital, interest free loans they have great flexibility to repay or not to repay, free land donations and incurring substantial airport construction costs. It is estimated that these state subsidies to the airlines amounted to $42 billion in the past ten years alone.

On their part, the airlines have heightened service to levels which cannot easily be matched by competitors. They have spared no effort as well to advertise themselves in their best attire and as outrageously as possible to show themselves top of the world to vaster audiences. Their current objective is to land and conquer ever-newer markets in as many important and less important airports places of the world which once used to pride themselves as having the best aviation facilities on earth. Not surprisingly, therefore, they have trounced the ‘legacy airlines’ of America and Europe on their own soil.

These foundation stones are very strong: Aren’t they good enough for those “super-connector” airlines from the hubs of the Gulf states and Turkey to consistently fill up their seats by constantly driving up the level of comfort they give to passengers with no higher ticket costs even for much longer passenger/km travels? How can an airline like Air Mauritius, concentrating on cutting costs and coping with dumping by its own politicians face up to such calculated and extensive conquest of the global civil aviation space? Forget Air Mauritius. Even European and American airlines are complaining bitterly with their governments at the unequal fight these global “super-connectors” have been giving them for years!

Evidently, Air Mauritius has a lot of catching-up to do to dare compete at the new global standards being set by the Gulf and Turkish leaders in civil aviation. We may not catch up with the strong position those airlines have acquired by increasing comfort, convenience and connectivities they give to non-domestic passengers from all over the world. With much more fuel efficient modern planes in their fleet, they have become so strong economically that they can match anyone else’s ticket prices for the same journey without having to cramp up their passengers in ever narrower seats and spaces!

What all this says is that Air Mauritius has to look at itself afresh in the light of such international developments in civil aviation. It can succeed only if it dares much more than it has ever done. There are big gaps to fill, not to allow our airline to be engulfed by predators. Our airline cannot surely rise to the occasion if it is always made to feel guilty? We also have to give it a smile of sympathy at least from time to time to raise its drooping spirits and, why not, give it also the push it needs to keep connecting us strategically and profitably with the rest of the world? Is this too much to expect from a country indulging all too often in cashing upon the feeling of guilt it keeps inflicting on the eternal “good-for-nothing others”? Air Mauritius will come out from its current plight if we manage not to shift all our problems at its doorstep. Can we?